Tax Tips for Individuals

Ready to Cash Out on Your Home? Beware of Capital Gains

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Home values around the country are soaring. The median price tag on a single-family home in the U.S. jumped 23% since last year. While it seems like a huge advantage for sellers, there’s one factor that may put a damper on your profit: capital gains taxes.

Your home is a capital asset, so the capital gains tax is what you pay on its appreciation from the time of purchase to the time of sale. The exact amount will depend on your income, your tax filing status and how long you’ve owned the home. And it could mean handing over more than you’d like to Uncle Sam.

The good news? There are some fairly simple strategies to help minimize the capital gains you’ll have to pay on a home sale.

Determine if you’re eligible for an exclusion. If you’ve owned your home for at least two years, then up to $250,000 of profit is tax-free — or $500,000 for married people filing jointly. But to qualify, there are other requirements that must be met:

  • You must live in the home for the majority of the year.
  • You must provide proof of residency (voter registration, utility bills, a tax return, etc.).
  • It must a reasonable distance from your job.
  • For married filers, you and your spouse must claim the same residence.

Factor in adjustments to the cost basis. Did you put on an addition? Renovate the kitchen? Install new central air conditioning? All of these home improvements increase the cost basis of your home. Your cost basis includes the price and acquisition costs of your home, plus a laundry list of property-related expenses. So if you purchased your home for $400,000 and sell it for $500,000 five years later, it may sound like you have a $100,000 capital gain. But if you spent $50,000 on renovations, your cost basis will be $450,000, lowering your taxable gain to $50,000.

Sell when your income is at its lowest. If you were recently laid off, took a pay cut or newly retired, it might work to your advantage. Because your capital gains tax is determined by your tax bracket, a dip in income could have a positive impact on how much you’re expected to pay.

No one wants to pay high taxes on a home sale...

Your home is likely your life’s biggest purchase. When the time comes to sell it, make sure you’re getting back every penny you’re entitled to receive. Reach out to the experts at Magone & Co at (973) 301-2300, and we’ll schedule a no-obligation confidential consultation to explain your options.

4 Common Filing Mistakes That Can Land You on the IRS Radar

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Planning to tackle your own tax returns in April? It may seem like a good idea for individual taxpayers, but mistakes happen — and they can be expensive. Even the best tax software can’t eliminate potential human error.

If you’re preparing to file your own return, take a second (or third) look to be sure you’re not guilty of making the four most common tax return mistakes.

  1. Transposed numbers. If the Form 1099 you receive shows $6,300 in income, and you inadvertently enter $3,600 instead, the IRS may interpret it as an attempt to dodge taxes. At best, transposing numbers will slow down your refund and raise red flags. At worst, it could trigger an audit. Be sure to verify every number you enter to ensure accuracy. Your tax software can tell you if your numbers don’t add up, but it can’t catch transposed figures.
  2. Misspelled names. It’s easy to misspell a name when entering dependent information, but doing so could cause real problems with your return. Double-check the names, ages and Social Security numbers of all dependents before submitting your return.
  3. Missing Social Security numbers. Don’t assume that your tax prep software will automatically populate your Social Security number. By checking for any missing information before filing your return, you can save yourself easily avoided IRS headaches later on.
  4. Not reporting all your income or taking too many deductions. It’s important to keep track of all your income and report it to the IRS correctly — not just your W2 wages. Remember, as a taxpayer, it’s your job to be honest and file returns correctly. If you alter a few numbers to get an extra deduction or write-off, the IRS will eventually catch up with you.

Don’t let past mistakes derail your finances

Whether there’s an error on your latest tax return or you have years of unfiled taxes, reach out to the tax specialists at Magone & Company. Call us today at (973) 301-2300 to schedule a confidential, no-obligation consultation.

Child Tax Credit Confusion: Use IRS Tools to Set the Record Straight

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To help working parents overcome the financial challenges brought on by the pandemic, the American Rescue Plan expanded the Child Tax Credit (CTC) to provide relief to more families than ever before. For tax year 2021, the CTC increased from $2,000 per qualifying child to:

  • $3,600 for children ages five and under at the end of 2021
  • $3,000 for children ages six through 17 at the end of 2021

Eligible families started receiving monthly automated payments of $250 or $300 per child on July 15th, without having to take any action. But some still haven’t received a credit, and you may be wondering if you’re missing out on money you deserve.

Am I qualified?

The rules are complex. According to the IRS, to qualify for advance payments of the CTC, you (and your spouse, if you filed a joint return) must have:

  • Filed a 2019 or 2020 tax return and claimed the CTC on the return

OR

  • Provided your information in 2020 to receive the Economic Impact Payment with the Non-Filers: Enter Payment Info Here tool

OR

  • Provided your information in 2021 with the Non-Filer: Submit Your Information tool

Additionally, you must meet these qualifying conditions:

  • Lived in a primary residence in the United States for more than half the year (the 50 states and the District of Columbia) or filed a joint return with a spouse who has a primary residence in the U.S. for more than half the year
  • Have a qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
  • Made less than certain income limits. The CTC may be reduced to $2,000 total per child (or phased out completely) if your modified adjusted gross income (MAGI) in 2021 exceeds:
  • $150,000 for married taxpayers filing jointly and qualifying widows/widowers
  • $112,500 for heads of household
  • $75,000 for other individual taxpayers

Who is a qualifying child?

For 2021, a qualifying child is defined as one who is under age 18 whom the taxpayer can claim as a dependent. (In other words, it’s a child related to the taxpayer who generally lived with the taxpayer for at least six months during the year.) The child must also be a U.S. citizen or national, or a U.S. resident.

Clear the confusion

If you’re among the unsure, the IRS recently launched a new online tool — the Advance Child Tax Credit Eligibility Assistant — that can help you determine if you qualify for the CTC and the monthly advance payments. This tool is particularly useful if your family doesn’t normally file a federal tax return.

Once eligibility is determined, you can take the next step and register for the CTC payments using the Non-Filer Sign-up tool. And for your convenience, the Child Tax Credit Update portal allows you to view information about payments and opt out of receiving payments if you wish.

Ask a CPA

If you have any questions regarding your previous tax returns or eligibility, don’t hesitate to reach out to the professionals at Magone & Company.

 

 

 

 

 

Big-name Firm? Local CPA? National Chain? How to Find the Most Qualified Tax Resolution Professional

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With the stakes so high, it’s surprising how little thought many people give to their taxes. All too often, people simply walk into a neighborhood storefront, hand over their most personal information and trust that the person on the other side of the desk will do the right thing. And that can mean trouble.

If you’re in hot water with the IRS because you chose the wrong tax preparer, you need a qualified tax resolution firm — and fast. Here are four tips to help you find the right one.

#1 Read their reviews online.

Online reviews can give you a good sense of a firm’s reputability, responsiveness and how they treat their clients overall. If you owe back taxes, for example, waiting weeks for a callback can cost you a significant amount of money. Even the most well-known firms that invest in huge marketing campaigns can have the worst customer reviews.

#2 Get to know their track record.

Negotiating with the IRS to settle your tax debt is a specialized skill, and not all tax professionals have it. Ask about their recent case settlements and success stories. A true tax resolution professional will have proof they’ve done this before.

#3 Ask about their communication process.

The IRS moves slowly, and there will likely be big gaps between their updates. But that doesn’t mean the tax firm you’re working with should go silent. The right firm will have systems in place to ensure you’re updated regularly. Find out their expected timeline and how you’ll be informed along the way.

#4 Avoid big firms that don’t deliver on personal attention.

You’ve seen their ads on TV and all over the internet. But if you call a big-name, national firm, you’ll likely get a salesperson who knows very little about taxes or how to settle your tax debt. They may promise you the moon on your initial call, but will fail to deliver because they didn’t take the time to understand your specific situation. They may not even be licensed tax resolution professionals. Find out who will be responsible for your case and try to speak with them directly before signing up.

Need tax relief? You’ve come to the right place  

If you’re looking for a tax resolution specialist who knows how to navigate tax resolution challenges, reach out to the professionals at Magone & Company. Call us today at (973) 301-2300, and we’ll schedule a confidential consultation to explain your options.

How to Turn Your Side Hustle into Tax Savings

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If you took on an extra gig last year to earn some extra cash, you may have found an unexpected surprise when you filed your taxes — a big bill. That’s because independent contractors don’t have money withheld by their employer.

But don’t worry. With the right preparation, your side hustle could actually help lower your taxes. Follow these tips to help ensure your extra work pays off.

Estimate what you expect to earn. When you have a good idea of how much income you’ll generate, you can better plan for potential deductions and make tax payments in advance to help avoid tax penalties later. Estimate your earnings by looking at how much you made last year. To further fine-tune the calculations, examine your monthly earnings to date and use that number to project this year’s income.

Consider a health savings account (HSA). Opening a health savings account can help reduce your taxable income more than you might expect. The money you contribute is fully tax deductible, and can be used to pay for out-of-pocket medical expenses. The earnings in the account grow tax free, and any funds left over at the end of the year are rolled over for future health expenses.

Open a self-employed retirement plan. There are a variety of retirement plans for the self-employed, allowing you to make tax-deductible contributions. If you’re simultaneously holding down a full-time job that offers a traditional 401(k) plan, you may also be eligible for a SEP-IRA — one of the simplest ways to shelter your self-employment income.

If your side-hustle becomes a second full-time job, you may also look into a solo 401(k). This type of retirement plan offers high contribution limits and has enormous potential for tax savings. Keep in mind, you’ll need to apply for an employer identification number (EIN) to open one.

Take advantage of deductions and write-offs. Do you run your busines out of your home? You may be eligible for the home office deduction, allowing you to write off part of your mortgage, utilities and other costs. You can also take a standard home office deduction based on the square footage of your dedicated workspace and the size of your home. Always consult your tax professional before claiming these deductions.

All it takes is one small misstep…

If you’re not careful, your hard-earned side hustle money can cost you big time when tax season rolls around. Find out how the tax experts at Magone & Company can help keep more money in your wallet.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

 

 

5 Actions That Can Unexpectedly Raise Your Taxes

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Knowing what factors can raise your taxes is one of the best ways to keep more money in your pocket. That’s why proper tax planning is a year-round practice. Here are five actions that can unexpectedly increase your tax bill:

  1. Cashing in your retirement plan. There are many reasons not to cash in your plan early, and the tax penalty is one of the biggest. If you take the proceeds from your 401(k) plan in cash, instead of rolling it over into an IRA, you’ll have to pay taxes on the money you withdraw. Even worse, you’ll be subject to a 10% penalty. By the time you’re done, you could lose up to half your hard-earned retirement plan to taxes and penalties.
  2. Working as a freelancer. Working for yourself is great, but it can trigger tax headaches. Freelancers and other self-employed workers are subject to self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. The tax hit can be substantial, especially if you don’t plan for it.
  3. Failing to take your RMD. You can’t keep retirement funds in your account indefinitely. You’re required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), the penalty fees can easily offset your savings.
  4. Skipping your IRA contribution. If you’re accustomed to making an annual IRA contribution, skipping that contribution can cost you. Before you omit it completely, run the numbers and see how the decision will affect your tax bill.
  5. Paying off the mortgage. Eliminating mortgage debt can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions. Losing that deduction may leave you owing more to the IRS. That’s not necessarily a reason to keep a mortgage, but it can be an important consideration.

With smart strategies for tax planning, the CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.